absolute return, annual review, benchmarking, Brexit, Newmark Security, NWT:LN, portfolio performance, relative performance, survivorship bias, track record, Trump, US vs Europe, Zamano, ZMNO:ID
Yes, it’s that time of year again…
But I must confess mixed feelings – for me, a year-end review’s just the annual conclusion to the (auditable) tracking of my ongoing portfolio performance. More generally, though, I suspect it can be disheartening for readers – as with much of the internet, the result’s often exciting at first…but ultimately demoralising. Have a tough year & there’s nothing worse than hearing about other investors chalking up block-buster returns left, right & centre.
But that’s the nature of the beast. Gone are the days when your one & only competitor was that insufferable git down the pub each Xmas, who always boasted he’d bet his chips on yet another ten-bagger (so why’s he still in your boozer?!). But today, we have the internet…now you compete with countless investors across the globe, no matter how experienced, gifted, or born lucky they are! And most laugh in the face of home bias – so inevitably, there’s a multitude who just surfed their killer local market & totally crushed your puny performance, esp. if you were running a sensibly diversified portfolio. Not to mention how little performance can actually be tracked, or who has any real skin in the game – don’t we all start out as great traders/investors, making big bets on paper, much like gamblers always start lucky!?
[And yeah, we all know that Twitter guy who spent all year flailing about, then bounces back with a breathless ‘Up +50% again this year…my leveraged Brexit shorts & US Prez Election longs worked perfectly, bro!’. Um, why are you even reading his tweets?!]
This is not to denigrate some great investors out there, who have clearly delivered spectacular results (& who genuinely appear to owe more to skill than luck). The internet is the problem here – namely, its ephemeral & anonymous nature – how many (tens of) millions of blogs, pages, discussions, user names & identities are abandoned over the years? As for investing, there’s a far more insidious self-selection process…we tend to only ever hear about the best investors (& the best returns). I mean, how many investors just get bored, discouraged, make (the same old) mistakes, lose money, blow themselves up? Who knows – in all likelihood, they’re long gone! The blog posts cease, the messages end, the tweets trail off, they move on (or start afresh)…and that’s precisely why the internet keeps beating you: Survivorship bias.
So, take heart, mes braves – if you really must, evaluate yourself vs. the indices & the fund managers who’ve actually built a long-term track record (through thick & thin). As for the internet, exploit it for data & potential stock ideas…not to beat yourself over the head, or get led astray. Let’s not forget, passive can beat active can beat truly active for long periods (hence the more recent performance of ETFs vs. mutual funds vs. hedge funds)…as frustrating as it can be, it’s important to remember there’s little correlation between the work you put into your portfolio & your actual short-term returns. As they say: In the short run, the market’s a bitch, but in the long run, it’s a weighing machine.
Nonetheless, in the euphoria of a Trump Rally*, many would prefer to forget how grim it was last year. Particularly in Jan/early Feb, when the markets headed straight off a cliff (a wobble in Feb/March this year wouldn’t surprise me either). A subsequent recovery then hit the brick wall of Brexit…though looking back, it’s proved indiscernible on the magnificent +14.4% FTSE trajectory for the year. Of course, many would point to the FTSE’s reliance on international & natural resource companies, but interestingly enough, the AIM Index clocked a near-identical +14.3% return…which certainly appears to confirm a more risk-on attitude. The real damage showed up in the FTSE 250, but it still delivered a modest +3.7% return in the end. Which all goes to show, a sterling crisis always seems to turn out well for the market – though noting the FTSE’s two previous/consecutive years of negative returns, a rally was maybe overdue regardless…
[*Beware of fake narrative: In reality, Europe has marginally out-performed the US since cob Nov-8th – and I mean the Dow, not just the S&P!]
Ireland’s the real Brexit loser, with the ISEQ down (4.0)%. As I’ve discussed before, Ireland’s competitive advantages (plus its underlying economic recovery & momentum), should more than compensate for any potential medium & long-term (hard/soft) Brexit threat to exports & tourism. [And Irish companies have coped with FX volatility for decades now]. However, after an initial false start, an ISEQ rally finally kicked off in Oct, besting its immediate pre-Brexit high by Dec – I see no compelling reason it can’t keep pace with the UK market now. [And after 5 years of consecutive positive gains, this annual decline’s an obvious & perhaps useful pause].
As for Europe, with the Bloomberg European 500 Index down (2.0)%, Brexit seems to have sparked fresh fears of euro withdrawal & dissolution. Which strikes me as a curiously American phenomenon (I’d rate the idea of a euro disintegration as almost equally remote, but nobody ever speculates on a US state reconsidering the buck!?). [Um, so what about this Calexit movement?!] And faintly ridiculous – Brexit’s nothing to do with the euro anyway. While the populist parties of Europe will obviously tar & feather the EU bogeyman for their supporters’ perceived ills, to also blame & repudiate the euro seems like a reach too far (but never say never when it comes to gullible/uneducated voters). In reality, two more states actually joined the Eurozone in the last three years & I fully expect this trend to continue (not reverse). I suspect the European banking system is still the real fear here (with Monte de Paschi & Deutsche two of the biggest/latest wobbles). A decade after a crisis America caused, it’s somewhat galling to see US banks in excellent shape, while so many European banks remain in limbo…somewhere between the US short sharp shock approach & Japanese zombification. [Not to mention the EU/ECB’s obsession with opposing all forms of state-aid].
Finally, we have the booby prize, the US election… A great reminder to never pay attention to the pundits (who totally ignored the omen of Brexit), or even bother trying to time/second-guess the market. Personally, I was cashed-up at the end of summer due to some profit-taking & cleaning house on legacy positions, but also because I anticipated significant Trump (& even Fed) related downside volatility pre & post-election. In the end, a negative Trump reaction never happened (except for a few hours of Uncle Carl time)…so in reality, predicting a (supposed) outlier event is only half the battle. [Fortunately, I averaged in from Sep, and never focused specifically on any #TrumpPicks (rightly, or wrongly), ending up fully locked & loaded by early-Dec]. However, it did occur to me afterwards that the market was ready to rally regardless, it just needed a new narrative…after all, both candidates promised fiscal stimulus (& profligacy)! Which makes sense looking back at the chart – the Trump victory/reaction now looks more like a natural extension of the +9.5% S&P trajectory for the year.
Which brings us to my FY-2016 Benchmark Return (a somewhat arbitrary average of the ISEQ, Bloomberg European 500, FTSE 100 and S&P 500):
That’s a +4.5% benchmark, which requires no further comment – so let’s hit the main event (except I showed my hand in Nov!), the Wexboy FY-2016 Portfolio Performance, first in terms of individual winners & losers:
[**Exited holdings, except TLI:LN for which I’ve adopted an estimated final NAV, since it’s now delisted/scheduled for a liquidation payment in Jan. Other holdings: Gains are based on average stake size (original yr-end 2015 allocations, except for FIG:US) & year-end 2016 share prices (vs. year-end 2015 prices). NB: Year-end 2015 share price for VOF:LN re-denominated to GBP, to reflect an end-March listing currency change. Otherwise, I specifically exclude all FX gains/losses & regular dividends.]
And ranked by size of individual portfolio holdings:
And again, merging the two tables – in terms of actual portfolio contribution:
Which provides all the gory detail: A (4.6)% loss for the year is actually my worst absolute return since the blog commenced…and also the worst relative return, being a (9.1%) shortfall vs. my benchmark.
Regular readers will note this is marginally worse than my (2.4%) H1-2016 return, so the carnage resulted from the H2 collapse in NWT:LN & ZMNO:ID – in fact, the majority of the portfolio delivered excellent H2 gains. But considering the size of my stake & the resulting negative contribution, the blame lies solely with Zamano (ZMNO:ID). I’ll resist the usual corporate response here – i.e. bunging out some pro-forma table, omitting all the bad bits – though obviously I must highlight my ex-Zamano FY-2016 Return would otherwise have been +7.7%, significantly ahead of my benchmark.
And fortunately, in the real world, things aren’t so grim. As noted in my Nov post, the math works against me: An 11.3% Zamano holding, in relation to the disclosed portion (at 57%) of my entire portfolio, is more like a 20% position when calculating performance here (i.e. the ZMNO collapse hit my blog portfolio twice as hard as my real world portfolio). While my undisclosed (for the moment!) holdings, which are far more biased now towards US & luxury stocks, boast a v different return profile (7.0%+) for the year – while dividends add another few percentage points. Granted, neither source of return is specifically relevant here, but they do tip my real world portfolio return well into positive territory.
Hey, you gotta pay the bills somehow…right!?
Now, in light of this blog performance, I see little point in focusing on winners here (but I raise my glass!) – instead, I’ll hold my nose & perform a brief post-mortem on each of the losers:
Rasmala (RMA:LN): (1)% Loss, (0.1)% Portfolio Return.
The loss is immaterial, but the +14.3% AIM Index gain’s a reminder of the opportunity cost here. Rasmala’s problem has been a negligent return on equity (RoE), with little chance an over-capitalised balance sheet would yield a decent RoE (even if the original operating/AUM targets were met). I also assumed an oil bear market (in the last few years) was irrelevant, as shariah fund management appeared to be a secular growth story, but with the operational disappointments here that became yet another negative influence on a neglected stock. Noting the fundamentals (NAV & AUM essentially unchanged for 3 years now), I assumed a 0.6-0.8 P/B trading range, which was clearly wrong…I never anticipated a 0.2-0.4 P/B range as a new normal here. A major corporate event (takeover, or liquidation) is inevitably required to realise shareholder value, so time remains the enemy…
Fortress Investment Group (FIG:US): (5)% Loss, (0.3)% Portfolio Return.
With a 9.0% total dividend yield (6.9% in terms of base dividend), FIG actually delivered a positive return overall. Over the last few years, AUM’s grown modestly, pre-tax distributable earnings remain steady, while net cash/investments (& gross embedded incentive income) comprise an ever-increasing percentage of FIG’s falling share price…coupled with a 20% reduction in outstanding shares (since end-2013), EV/AUM has become progressively more compelling. However, when it comes to asset management firms, all investors seem to focus on is AUM growth, plus the ongoing switch from active to passive management (despite its basic irrelevance for private equity firms), so the slowdown/halt in FIG’s AUM growth in the past year (or so) has been punished severely. Poor hedge fund performance over the past few years also seems to have (unfairly) tainted the private equity firms, while lingering fears of a fresh bear market has compressed multiples in such a (potentially) high-beta sector…it’s been a painful trend to fight/outlast.
Donegal Investment Group (DCP:ID): (12)% Loss, (1.0)% Portfolio Return.
Like many Sum-of-the-Parts investments, Donegal offers a fairly negligible return on equity, with stated NAV unchanged over the last 4 years (after a modest dividend). So while underlying intrinsic value still appears substantially higher, seeing the share price trade down to a modest NAV discount is unsurprising. The major error to date is the assumption management could & would move much faster here to: i) realise & enhance underlying intrinsic value, with the legal acrimony re Donegal’s stake in Monaghan Middlebrook Mushrooms particularly at issue, and ii) restore/expand margins in both the core produce business and non-core speciality dairy & animal feed divisions. Again, time is the enemy here…
Newmark Security (NWT:LN): (50)% Loss, (4.7)% Portfolio Return.
Having already identified the electronic division as a millstone, with a decade-long history of stagnant revenue & declining profits, I presumed management would be forced to aggressively rationalise, liquidate, or otherwise dispose of this business. This would have freed up more surplus cash, and just as importantly, re-focused management’s attention on the more valuable (but more volatile) asset protection division. But so far, management’s dug its heels in, continuing to allocate disproportionate time & assets to the electronic division, despite the fact it’s now loss-making (to the tune of £0.5 million). Which I suspect took management’s eye off the ball elsewhere – as a result, NWT now expects a loss this financial year, due to a revenue/profit shortfall in the asset protection division (which hopefully proves a timing/sales pipeline issue ultimately). Despite a cheap market valuation, the share price reaction was exacerbated by the CEO, who’s (laudably) sales-driven, but perhaps not yet experienced enough to actually under-promise & over-deliver…
Zamano (ZMNO:ID, or ZMNO:LN): (55)% Loss, (10.8)% Portfolio Return.
Who wouldn’t throw their hands up in disgust here… Zamano’s CEO resigned in May – which, at the time, I suspected was ultimately a good thing in terms of strategy, but in reality it’s left an operational vacuum ever since. New initiatives such as Messagehero, new/developing geographic markets & direct carrier billing, all seem to have evaporated. And despite having ‘planned for implementation of Payforit’, shareholders were still blind-sided by a Sep trading update stating it would now have a ‘material adverse impact’ on UK revenues. While I never expected significant operational growth potential here, this reversal still came as a shock – but my primary error was to presume management would actually focus on shareholder value & sensible capital allocation, despite having no real skin in the game…i.e. no vested interest in the current share price. Unfortunately, the same was perhaps true of the major stakeholders, albeit for a different reason – being trapped by the size of their stakes vs. the illiquidity of the shares, a potential exit price was pretty much the only relevant metric for them ultimately. Fortunately, the recent operational debacle appears to have changed all that – the (fruitless) acquisition strategy’s now off the table, the board has slimmed down, and management’s had to come up with a plan to preserve Zamano’s profitability & €7.3 million cash pile (vs. a €6.0 million market cap).
But what’s most notable here, in terms of lessons to be learned, is the fact my major losers of the year were both micro-caps. That’s not to suggest avoiding such stocks in the future, but it does suggest limiting their overall portfolio allocation (bearing in mind they tend to be illiquid). It also re-confirms my current approach…which is to demand a more asymmetric risk-reward from micro-caps (vs. large-caps), to compensate for the increased risk(s). Which has generally served me well over the years in terms of interesting opportunities – not to mention, consistent pricing discipline can hopefully save your ass…
[My ZMNO & NWT losses are actually limited to 25-30% (vs. original entry prices), despite their collapsing share prices – i.e. mostly unrealised gains were incinerated – not a happy state of affairs, but no catastrophe either].
The real risk, I believe, is a creeping confirmation basis: In reality, a micro-cap double is no big surprise, but it can quickly fool you into thinking such stocks are actually resistant to negative surprises, and even have the ability to consistently compound in value & even attain a full (or even excessive) valuation. But in reality, they’re not…any unexpected surprise, no matter how small, is almost inevitably material relative to their size, and in terms of management’s ability to actually deal with it. And the historical record’s bleak – the vast majority of micro-caps stay micro-caps forever. Not to mention, you may face a risk that’s prevalent in so many special/activist situations…things may even have to go (badly) wrong, before management is finally forced to come to its senses & make some rational/shareholder-friendly decisions. Summing all that up, I really have to wonder if an auto-exit after a quick double (one should be so lucky) is perhaps the golden rule when it comes to micro-caps – it certainly would have banked some tasty profits on both ZMNO & NWT, and saved me from their current travails…
Now – for some useful longer-term perspective, let’s wrap up with a table detailing the the last five (calendar) years of blog performance.
[NB: Barclay Hedge Fund Index performance is best estimate as of end-Dec.]
[Again, please note regular dividends are excluded from returns – which hopefully provides a reasonable indication of likely net performance, e.g. after fees (& bid-ask spreads) (and noting a low turnover ratio). Plus most investors tend to compare investment performance vs. price indices, rather than total return indices – another good reason for this approach.]
For an easier recap, let’s redo this table here:
The Wexboy Portfolio has chalked up a +45.5% Total Gain, and a +7.8% CAGR, in the last 5 years. Which looks respectable for a reasonably well-diversified portfolio, run just as much to preserve wealth as to enhance it, particularly noting the low rate/low growth environment in which we now reside. But obviously this performance falls well short of my benchmark, which boasts a +10.8% CAGR…though I’m heartened to see I’m still close to an ex-ISEQ benchmark (perhaps a more appropriate real-world benchmark) (for an +8.4% CAGR), and well ahead of the hedge fund universe (on a +5.8% CAGR).
Again, I lay the blame on Zamano…it’s astonishing a single stock, in a single six month period, can throw off my long-term performance so much!? Ex-Zamano (specifically, in FY-2016), my 5 year performance would otherwise have been a +64.3% Total Gain, and a +10.4% CAGR – pretty much equalling my benchmark. Hopefully, my relative portfolio performance picks up again from here, and we can forget such pro-forma alternatives!
And finally, I can’t resist…take another look at those last tables, have you noticed the incredible divergence in performance for the US vs. Europe (& the UK) over the last 5 years?! On average, the S&P’s racked up well over double the gains of the two lagging indices – is this really sustainable?! Consider the relative position of the US vs. Europe…the same 2.0% Real GDP trajectories in 2015-2016 (contrary to general opinion?), a euro that’s now almost 25% weaker vs. the dollar in just three years (not to mention, pronounced dollar strength & euro weakness across the globe), their current positioning in terms of QE super-cycles (rising rates & no fresh bond buying vs. negative rates & continued bond buying), the more recent US earnings-growth drought, the unpredictability of a Trump regime (though we may also see fresh populist risk in Europe this year), etc. Also consider Europe’s P/E ratio, which has now reached a 35% discount vs. the US, compared to a long-term median P/E which is indistinguishable from the US (a mere 3% discount).
Personally, I’m reminded of Germany at this point. Remember it was labelled the ‘sick man of Europe’ back in the late ’90s – obviously, for specific reasons at the time – but this ultimately heralded (almost inevitably?!) a subsequent golden era of market/economic out-performance. I have to wonder if Europe (um, not just Italy?) is now the ‘sick man of Europe’ itself…as counter-intuitive as that might feel, it’s at least worth pondering whether the region’s finally lining up as a compelling contrarian bet?!
In reply to last LB comment above, from Feb-10th:
The introduction of Payforit (& its impact) is related to NEW customer acquisitions. So it would be wrong to assume Zamano suddenly has zero revenue & a continuing cost base next month when Payforit also hits in Ireland – it will continue to have an ongoing/underlying run-rate of revenue in both markets (plus some overseas business), so IF they can manage a further/orderly run-down in staff & expense, they can actually protect the company’s current cash position. [And this obviously triggered the RNS itself & proposed orderly wind-down]. Now, I’m not suggesting this is necessarily long-lived revenue (as you might find in certain other sectors), so it’s important we see another RNS asap to flesh out this wind-down more precisely & to lay out a definitive strategic alternative and/or monetisation strategy for shareholders to consider. But based on new sense of urgency (& realism) we’ve actually been seeing since Nov, I think it’s reasonable to presume everything’s being done & as quickly as possible to further restructure the business & protect the company’s cash.
Alan Hofmeyr said:
Zamano: Is there any hope of a worthwhile liquidation dividend or other exit from this. If liquidation, any idea on final worth per share?
Per the last RNS:
Zamano’s acquisition strategy is now off the table, the board’s been slimmed down accordingly, all business is being wound-down to protect company’s cash position, and the default strategy is to monetise the UK/Irish listing & ‘return the maximum amount of cash possible to shareholders’. The wild card here is a possible strategic alternative – such a transaction would hopefully/presumably sweeten the pot.
Not going to make a final net worth estimate here – the directors presided over this debacle, so it’s up to them to now maximise Zamano’s current value! And the timeline involved may well be just as important – the last thing the directors should do is wait ’round for months/years for the perfect deal/buyer to come along. It’s crucial they focus on evaluating any realistic transaction(s) that are actually on the table right now, compare it/them to the potential value of the default strategy, and present (& recommend) a final proposal to shareholders ASAP.
A Hofmeyr said:
Many thanks for your update.
Your blog has always been interesting to read and you have some great insights on valuation and stock selection – your “Great Irish Share Valuation Project” in particular has always been fascinating to read.
However I think you should take responsibility for Zamano and admit a mistake was initially made in buying a company with a non-existent economic moat, questionable product offering and in a market where competitive rivalry is very intense. The revenue and cash flow generating ability of the firm were based on a product whose business model, for me at least, was difficult to discern.
Taking responsibility for mistakes will help you learn and become a better investor and should prevent cop-out statements such as,”Again, I lay the blame on Zamano…it’s astonishing a single stock, in a single six month period, can throw off my long-term performance so much!? Ex-Zamano (specifically, in FY-2016), my 5 year performance would otherwise have been a +64.3% Total Gain, and a +10.4% CAGR – pretty much equalling my benchmark.”
Hindsight bias is a wonderful psychological tool for justification. More worrying is the fact that Zamano was your largest holding so the “Ex-Zamano 5 year performance” statement becomes even more meaningless – had it been a negligible percentage of your portfolio then you could brush it off without much thought.
Finally you should discount all Zamano’s intangibles to 0 and give up any hope of extracting any cash from them before they return capital to shareholders – goodwill makes up the majority of their intangibles which cannot be sold on and internally generated development costs, which arguably have no place on the balance sheet, will also find no willing buyer as they are specific to Zamano and cannot be easily transferred.
We all make mistakes but those who progress as investors have the courage to publicly admit their flawed thesis and draw valuable lessons going forward to ensure superior performance is achieved.
Ouch…well, that’s me schooled!
Well, I must say, I never labelled Zamano as a ‘moat’ stock, let alone a growth stock…in fact, I highlighted its profitless revenue growth (i.e. in incremental terms) in recent years. As for intangibles/capitalised expense on the balance sheet, that’s irrelevant – my focus was almost exclusively on cashflow, not the P&L or balance sheet (except for cash itself). The company obviously survived in the industry for nearly 20 years & was a consistent cash generator in recent years, but in the end ZMNO was tagged as a special/potential activist situation…when they work out you look brilliant, and when they don’t you can look pretty stupid.
Most people on the internet/in the media don’t own (or you don’t know IF they own) the stocks they talk/write about, you’ve no idea how much skin in the game they have, and they never live/die by their recommendations – they just move on, with little/no tracking of performance (or disasters). But this blog was designed v intentionally as a (transparent) window on a real world portfolio. Unfortunately, success has many fathers, but failure’s an orphan – that’s human nature – people often focus on your mistakes/disasters, but tend to discount your successes.
[An extreme example, but still instructive: I wrote up US Oil & Gas (& specifically adopted a mostly calm/rational perspective) as a worthless stock promotion: https://wexboy.wordpress.com/2012/09/14/the-new-vegas-us-oil-gas-usop/ For this, the only thanks I ever received for saving anybody from this total disaster – obviously, it’s worthless/delisted today – were actual death threats (which I thought were utterly pathetic, but they alarmed my wife). Then again, if someone actually owned USOP, the chances they’d finally see sense reading my post & thank me accordingly were always slim to none..!?]
At the end of the day, we all make mistakes & suffer disasters – from day one, I just knew I’d have to do it here publicly. As the joke goes, I’m proud I no longer make the same mistakes…now I just make different ones instead. While a 40% loss on ZMNO is galling, it’s not a disaster either – and it happens to ALL of us – in this particular instance, you can bet far larger ZMNO shareholders are feeling even less smart now, esp. since they had the power to potentially grab the wheel from management. As for highlighting my ex-ZMNO performance, I would have thought it served as an obvious object lesson in the value of Rule 1. Don’t lose money, and Rule 2. Don’t forget Rule 1! I can’t excuse mistakes/disasters to readers – in fact, I have to promise they’ll happen again, inevitably – but if they suffer a loss on a stock I own too, they should know I obviously feel the same pain & more, this is certainly no game for me. And as for position-sizing, I’ve always recommended 3-7.5% positions as being most appropriate (I originally wrote up ZMNO as a 6.4% holding – mostly, it appreciated into one of my largest positions): https://wexboy.wordpress.com/2013/08/07/fear-greed-i-2/ https://wexboy.wordpress.com/2014/05/18/zoom-zoom-zamano/
As you say, lessons learned is probably now the most important value to be reaped here. Unfortunately, I’ve found the format of the blog hasn’t always lent itself to post-mortems: I try include updated commentary as much as possible, some stocks enjoy value-realisation events, others reach my price targets, I average (in &) out slowly from positions*, and some investment theses are obviously overtaken by mistakes & events – so often there’s little new or revealing left to say at that point. [*https://wexboy.wordpress.com/2015/12/31/so-just-average-is-best/] And every investor learns differently…I suspect the value for individual readers may well come from learning their own lessons anyway from my public failures (and/or successes). That being said, I will highlight some possible redemption (& learning, to boot):
– A pal recently asked what was the biggest/worst mistake I’d made (or have kept making) since the blog began. A great question, and I actually had an immediate & specific answer…which I hope to publish as a blog post in due course.
– Look back & you’ll see quite a few posts (over the last 12-18 mths) placing an ever-increasing emphasis on rotating into higher-quality/growth stocks (particularly, despite the recent Trump Bump, if we remain in what seems like a never-ending low-growth low-return environment – secular corporate growth (& quality) should obviously be v highly valued in such a paradigm). This focus may seem at odds with probably half my disclosed holdings now, but it’s certainly reflected in a selection of new (& ideally ‘moat’-like) holdings into which I’ve been slowly but steadily averaging (but which remain undisclosed for now). [My portfolio’s clearly a life-time endeavour, so it changes v slowly, no matter how compelling turning on a dime might seem each day as the pundits mouth off] And illustrating the luck of the draw here, my most successful holding last year was actually a luxury goods stock – clearly, a company intent on building & maintaining an economic moat – but unfortunately it never quite made it onto the blog.
And so, I certainly hope you’ll be sticking around for a few new posts & investment theses to come…
[Not sure if you’d seen today’s RNS from ZMNO, when you posted this comment: http://www.investegate.co.uk/zamano-plc–zmno-/rns/trading-update/201702030700069347V/ Cold comfort, indeed…but it appears my latest ZMNO commentary did anticipate the end-game here, with directors now looking to monetise any remaining value from the biz and/or the company’s UK/Irish listing, and return the max. amount of cash (/value) possible to shareholders: https://wexboy.wordpress.com/2017/01/27/top-trumps-for-2017/%5D
What’s the strategy now Wexboy re Zamano? Will you try and exit the stock or wait until it’s wound down to get distribution to shareholders?
Contrast the Sep trading update with the subsequent Nov/Feb updates. Clearly, the board (& presumably the major shareholders) have now grabbed the steering wheel from management, and the operating focus is now exclusively on protecting ZMNO’s cash position. Plus the board now appears to be actually evaluating one or more strategic options (i.e. it’s not a strategic review process they’ve only just launched).
Based on this, Zamano is purely an event-driven investment now…and like most such investments, the down-side appears relatively limited here (vs. current share price & net cash position), while the strategic options may offer some potential upside. And so, the primary risk here may in fact be timing now – as is often the case with event-driven – i.e. how long before we have confirmation & execution of a transformative event and/or payout for shareholders.
I hold accordingly…but for other individual shareholders, it will depend on their portfolio & perspective: On average, event-driven investments do offer attractive risk/reward, but if you’re itching to buy a high potential growth stock right now (for example), you may prefer to raise some necessary cash. [A compromise may be to wait for the board to actually announce a definitive strategic option/plan, then evaluate potential value/payout & timing at that point].
I agree with this but a big giveaway from the trading update was that the business would not be “cash flow positive” in the next few months, which implies a narrowing margin of safety and thinner cash buffer on purchase
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John W said:
Any idea why the VOF fund outperformed the VNM ETF so well? The divergence is spectacular.
Do you have any hope for Zamano? Is it a case of cut my (significant) losses and move on?
a) Wow, you’re right, that’s a spectacular divergence..!?
Well, I can explain VOF:LN – I should first note, I deliberately chose VOF (vs. other ETFs/closed-end funds) because Vietnam’s still a frontier market & it’s a tall order for investors to predict what asset class(es) might end up in demand/delivering superior performance. Therefore, I think a diversified fund like VOF – which invests in listed (& OTC) stocks, direct property, private equity & infrastructure – is both defensive & probably the better long-term performer. Of course, 2016 also turned out to be a perfect storm for VOF, in a good way…
We can ignore $/VND, it barely moved all year, but everything else helped VOF: i) While the VN Index was up about 15%, VOF’s NAV growth was almost double, helped by good news & chunky gains from its property, private equity & OTC portfolios. ii) VOF’s quoted in sterling, so the collapse in GBP/$ last year hugely magnified this NAV growth. And iii) not surprisingly, VOF’s discount to NAV also narrowed appreciably last year, though it still remains attractive.
As for VNM:US, I’m shocked…technically, it didn’t underperform, it basically matched its benchmark index. But that’s an index (the MVIS Vietnam Index*) I’ve never heard of before – it notably includes overseas Vietnam-exposed stocks (almost 25%), presumably it doesn’t include OTC stocks, and obviously doesn’t include property/private equity exposure. But even vs. the VN Index, it massively under-performed – frankly, I’ve never seen such a shitty benchmark index, in terms of its negative 1 year & long-term performance!? [I’m sure a lot of VNM shareholders are not even aware of this divergence, which is a shame]. That’s not to say, it (& VNM) won’t out-perform VOF & the VN Index in any single year…but based on its lifetime performance to date, and the specific reasons I highlighted above, I’d be very reluctant to ever choose VNM over VOF.
b) Zamano: Well, it depends on what you’re looking for exactly…now it’s clearly in the special situation camp (though I never tagged it as a potential growth stock anyway). The company remains rudderless (still nothing regarding a CEO) – the only good news is that acquisitions are finally off the table, plus the remaining management team’s finally been forced to come up with & implement a restructuring plan (which should have been at least outlined alongside the Payforit warning, not two months later) to ensure the company remains profitable/cash-generative & to protect its EUR 7.3 million cash pile.
But presuming that, the last trade price values Zamano at a near-30% discount to cash, plus I believe the business still has significant value (at least in relation to its current market cap) in terms of intangible assets and/or the potential stabilisation in revenue/possible profits going forward (don’t forget the company’s a survivor for almost 20 years now). But investors obviously aren’t prepared to give management any benefit of the doubt here, and to date the company’s cash pile has been inaccessible (& therefore ‘worthless’ in many respects) – realistically, a decent return from here is only going to be delivered via a sale or liquidation of the company, with the cash pile returned to deserving shareholders (now the only logical step, with acquisitions killed off & presuming the restructuring ensures profitability). So I can see a potentially attractive upside, but it obviously depends on the timing here & I can’t predict that (plus it still requires a strategic plan & subsequent execution from the board).
Did you account for the TFG dividend? With such a high distribution the component is significant. What do you think in general about the stock after the run-up last year?
Yeah, TFG dividend yield was a tasty 6.7% last year, and now stands at 5.4%. As I noted above, I specifically do NOT include dividends in my blog performance analysis – for a couple of reasons, but primarily since I prefer to keep it simple & compare performance (as most people do) to the headline market indices, which also exclude dividends. For the record, the average yield on my dividend-paying/disclosed holdings was 5.5% in 2016 – in terms of my overall disclosed holdings, that equates to a 3.1% dividend yield. My undisclosed portfolio is probably not all that different, perhaps marginally lower – hence, I also disclosed above that ‘dividends add another few percentage points’ to my real world portfolio/returns.
I remain just as bullish on the stock, long-term – the discount to NAV is still ridiculously large in terms of TFG’s liquidity, lack of debt, value-enhancing tender offers & medium-term NAV performance…not to mention its increasingly attractive alternative asset management biz/platform that continues to grow by leaps & bounds.
UK Valueinvestment said:
Great post – enjoyed it very much.
Good to hear – ta very much!
I have to say, I agree with you on your outlook for 2017. There is a huge disconnect between stock prices in the US and Europe. In fact, there is an even bigger disconnect between prices in China/Russia and the US. Unfortunately China/Russia scare me to death, so I will only ever touch them with a fund or some sort of broad basket, but in Italy, UK, Spain, I totally see better individual value vis a vis the US. I mean, who wants to buy a US mega cap with negligible growth that’s trading at a PE of 30? When I read all these people on Seeking Alpha and the like boasting about their US dividend growth portfolio’s have outperformed for the the last 8 years, sooner or later this type of strategy will falter.
Lots of people end up completely intoxicated with the momentum of their favourite sector(s)/market – all thoughts of diversification fly out the window. Of course, they’re mostly mistaking luck for skill, and it will almost definitely end in tears…but as I’ve highlighted above, that’s often cold comfort for more sensible investors who are busy trying to keep their portfolios anchored in terms of value & diversification, particularly when momentum-driven stocks/markets inevitably seem to last much much longer than you ever reasonably expected. I wouldn’t disagree with any of the sectors/markets you highlight, in terms of over/under-valuation. I guess I’d recommend two approaches:
Funds/Averaging: Markets are basically impossible to time & being off a year or two, for example. in terms of an entry (or exit) can be really painful. Rather than beat yourself over the head & constantly second-guess yourself, long-term averaging in (& out) of individual markets/regions – ideally, via funds – is a great approach to take & definitely removes some of the fear, greed & pain from the equation.
Stock-picking: The temptation is perhaps to look for value stocks in value markets – while that seems to make compelling sense, I actually think value markets offer far better opportunities to buy high quality/growth stocks for the long-term at a reasonable price (much like buying the best companies in a recessionary market). [And while I agree the US market looks expensive, I think it still offers a select bunch of best-of-breed stocks, also at reasonable prices].
In the end, you have to accept far dumber investors’ performance may surpass yours, sometimes for years on end – so you simply have to ignore that fact! Plus you always have to focus on beating them in the long-run…by building a diversified portfolio focused on good stocks & markets at decent multiples & avoiding potential blow-up stocks & markets at ever more ridiculous multiples.
I would not go for the contrarian Europe bet yet. They are following thesame path as Japan – but less efficiently – everyone has thought Japan would bounce back and it has not yet happened (notwithstanding the year it had last year).
I wouldn’t necessarily disagree…I am much slower to bet on value & bet against momentum these days (see my reply to Adam above). Frankly, I sometimes worry the apparent relative gap opening up between the US & Europe may, in the end, prove deceptive – by which I mean, actually they may both be in the same boat as Japan.
Since nothing’s worked for Japan combating a decades-long deleveraging, why exactly are we all so confident the US (& Europe) have magically found the solution (simply printing money…what’s new about that?!) & the exit to what is perhaps an even worse deleveraging. Either way, I reckon the numbers suggest Europe might be the better relative bet (eventually?!) – but of course that doesn’t necessarily imply great absolute performance, if the US & Europe are in fact now reliving Japan’s long & painful journey. We shall see – but then again, I’m confident the Fed/ECB won’t stop at nothing at this point…they’ll print & be damned & don’t spare the horses, if necessary!
So maybe not so cheers…
Super stuff Wexboy, I like you set such high standards and the work you put into the research. Defo your passion for investing properly has inspired me to go about it the same methodical way, first thing I do in work is check my stocks on Degiro!! Best of luck for 2017, hope Davy F helps that hurling team of yours too:)
Thanks, Trig – always nice to hear such feedback, particularly if I can offer some useful guidance/motivation now & again. Def check your stocks each day to keep on track & keep the investing spirit burning…just don’t trade every day! #go #yellabellies Cheers, Wexboy